Paper warns of risk of 2.2% fall in UK GDP if single market membership lost
A new paper produced by the University of Warwick’s Centre for Competitive Advantage in a Global Economy reviews the literature on the implications of EU membership for the UK and warns of a risk of a 2.2% fall in UK GDP if single market membership is lost.
The paper is published today by the Social Market Foundation (SMF) think-tank.
Professor Nick Crafts, author of the paper, commented:
“The net benefits of entry into the EU for the British economy were substantial. They were obtained by pooling sovereignty. Brexit entails an opportunity to regain some sovereignty probably at significant economic cost. Is this a price worth paying? – I don’t think so but others will disagree.”
Emran Mian, director of the SMF, said:
“This research looks at the academic evidence for the impact of membership of the EU on the UK’s economy. It argues that EU membership has been even more beneficial for the UK than its supporters claimed in the 1970s. It also warns that Brexit is risky and its impact would depend heavily on the terms negotiated and the use made of the policy space that it frees up.
“Brexit could mean that the UK gives up some of the benefits that it has obtained from EU membership. The research suggests that it’s unlikely that all the gains would be lost but a scenario where the UK does not negotiate continued membership of the Single Market – and also fails to liberalise non-EU trade and to de-regulate – could easily entail net welfare costs of the order of 2.2 per cent of GDP.”
Key findings from the paper:
Effect of EU Membership on the UK economy
- Membership has raised UK income levels appreciably and by much more than 1970s’ proponents of EU entry predicted.
- Joining the EU membership raised the level of real GDP per person in the UK compared with the alternative of staying in EFTA. The deeper economic integration that EU membership entailed increased trade substantially and this had positive effects on income.
- Using a variant of the standard methodology pioneered by Frankel and Romer (1999) suggests that the impact was an annual gain equivalent to about 10 per cent of GDP. This far exceeded the ‘membership fee’ required in terms of the net budgetary contribution and net costs of regulation which have totalled about 1.5 per cent of GDP.
- These positive effects stem from the EU’s success in increasing trade and the impact of stronger competition on UK productivity.
- The economic benefits of EU membership for the UK have far exceeded the costs of budgetary transfers and regulation.
- In the context of the 1970s at which point the UK had endured a long period of protectionism, the ‘shock’ of joining the EU had favourable effects on productivity and was part of an effective antidote to relative economic decline which worked through strengthening competition as contemporaries suspected might be the case.
- Nevertheless, the ex-post magnitude of the income gains was much greater than even the optimists imagined ex-ante.
The impact of Brexit
- The paper suggests that “Brexit is risky and its impact would depend heavily on the terms negotiated and the use made of the policy space that it freed up.”
- Brexit could mean that the UK gives up some of the benefits that it has obtained from EU membership.
- It is unlikely that all the gains would be lost but a scenario where the UK does not negotiate continued membership of the Single Market and also fails to liberalize non-EU trade and to de-regulate could easily entail net welfare costs of the order of 2.2 per cent of GDP.
- Leaving the EU in this way would also discard the ‘commitment technology’ provided by membership that limits the room for manoeuvre of a future would-be protectionist government.
- It is possible that Brexit could deliver net benefits to the UK but this would depend heavily on the use made of increased policy space. If Brexit is driven by a desire to control migration from Europe, other things equal, it will be relatively costly because it will mean withdrawal from the Single Market.
-ENDS-
NOTES TO EDITORS
- The paper was written by Professor Nicholas Crafts Director of the ESRC Centre for Competitive Advantage in the Global Economy at the Department of Economics, University of Warwick.
- For press enquiries, please contact David Mills, SMF Communications Director via david@smf.co.uk
About the Social Market Foundation:
The Social Market Foundation (SMF) is an independent, non-partisan think tank. We believe that fair markets, complemented by open public services, increase prosperity and help people to live well. We conduct research and run events looking at a wide range of economic and social policy areas, focusing on economic prosperity, public services and consumer markets. The SMF is resolutely independent, and the range of backgrounds and opinions among our staff, trustees and advisory board reflects this. smf.jynk.net
About CAGE:
Established in January 2010, CAGE is a research centre in the Department of Economics at the University of Warwick. CAGE is carrying out a ten year programme of innovative research. The centre’s research programme is focused on how countries succeed in achieving key economic objectives such as improving living standards, raising productivity, and maintaining international competitiveness, which are central to the economic wellbeing of their citizens. Our research analyses the reasons for economic outcomes both in developed economies like the UK and emerging economies such as China and India. We aim to develop a better understanding of how to promote institutions and policies which are conducive to successful economic performance and endeavour to draw lessons for policy makers from economic history as well as the contemporary world. Research at CAGE examines how and why different countries achieve economic success. CAGE defines ‘success’ in terms of well-being as well as productivity. The research uses economic analysis to address real-world policy issues. The centre is distinctive in providing a perspective that draws on economic history as well as economic theory and is applied to countries at various different stages of economic development. www.warwick.ac.uk/cage